FOREX-Dollar drifts off in summer lull, tracks yields

SYDNEY, July 23 (Reuters) - The dollar was nursing broad
losses in Asia on Tuesday as soft U.S. housing data offered an
excuse to sell, while a sharp fall in Portuguese bond yields
provided a boost to the euro.

Dealers said liquidity had dried up amid the northern summer
and activity had been characterised by a general trimming in
short positions of everything from the Australian dollar to the
yen and gold.

"We've hit the summer lull and volatility has dropped right
off," said a trader at an Australian bank. "The longer-term
outlook is still for dollar strength given the Fed is much
closer to tapering than any other major, but for now people are
just trading on technicals."

As a result, the dollar was testing chart support at 99.56
yen and a break there would see a move to the next
bulwark at the July low of 99.28.

The euro was up at $1.3186, after touching a
one-month high of $1.3218, while the dollar index fell
0.5 percent to 82.220.

The single currency won a reprieve from political worries
after Portuguese President Anibal Cavaco Silva said the current
government will stay in office to keep an international bailout
on track. That saw a sharp narrowing in Portuguese bond spreads
over bunds.

The dollar was not helped by a surprising 1.2 percent fall
in U.S. existing home sales in June, though they were
still up over 15 percent on the same month last year.

While the Federal Reserve is still expected to start
tapering its asset buying before year end, a recent run of mixed
data has lessened the urgency for a shift and pulled Treasury
yields off their highs.

"The dollar has been moving in lock step with yields and to
get the uptrend going again it will likely need 10-year yields
to break above the July peak of 2.755 percent," said the trader
at a local bank. "But that's a big level. It'll be tough to
clear."

That was one reason the Australian dollar had managed to
recoup a little ground to reach $0.9251, though it
faces stiff resistance in the $0.9292 to $0.9306 area.

It will also be tested by Australian inflation data due on
Wednesday where a low result will only fuel speculation of an
August rate cut from the Reserve Bank of Australia.

There is little in the way of major economic data due in
Asia on Tuesday with the next big release being the HSBC flash
PMI for China out on Wednesday.